Maybe I am inspired by the new series I wish to conduct on anti-capitalism. This will be the first in a series of posts on revealing myths about myths. In an article in Nature, in 1998, Economists Don Fullerton and Robert Stavins ignite one of the most combustible straw men in all of economics – the “myth of the universal market.”
In an effort to make friends with the ecologist community, Fullerton and Stavins try to “improve interdisciplinary communication” to let the ecologists know that markets aren’t all they are cracked up to be. The authors claim that economists believe that the market solves all problems. That is stated without proof or without even the slightest hint of anecdote or even a misplaced quote. Sowell is famous for saying, there are no solutions, only tradeoffs. As a rule, the definition of economics admits that there are no solutions to problems – only varying degrees of tradeoffs. Some are more desirable than others. If as a definitional point we do not believe that there are solutions, how can we be accused of advocating that the market solves all of the world’s problems?
No one says such a thing. But the closest thing you might get from a market-oriented economist (i.e. one with legitimate credentials, and a Ph.D is NOT required to have ’em) is the suggestion that markets do not always work so well, but they are still more desirable than the alternative. Only a hack dogmatically believes and asserts that markets are the be all and end all. However, good economists understand the role that market incentives play in aliging private interest with socially desirably outcomes – and it would be hard to find similar incentive alignment in government or other organizational forms. If markets sometimes fail, and governments are supposed to come in and correct them, is it not even slightly reasonable for someone with a brain to question whether governments fail too? And how and why?
But that is not even the worst offense in the article. The worst offense comes here:
The maximum general welfare is what economists mean by the efficiency of competitive markets … where the necessary conditions … many buyers and sellers operate with good information and low transactions costs to trade well-defined commodities with enforced rights of ownership.
That whoosh is the gasoline being poured on our straw man. These guys went to an Intro Econ textbook, and just rattled off the conditions under which a market might be defined as “perfectly competitive.” No economist worth his salt ever claimed that markets satisfy these conditions, no economist worth his salt ever claimed that these are even desirable conditions, and no economist worth his salt ever claimed that market outcomes would not be “efficient” if some or all of these conditions were not met. For example, take the meme about “well-defined” commodities. By this the authors mean that unless a market consists of a single, uniform good that is recognizable the world over, then the outcome of a market process could not be efficient. So, the gold market might be efficient, but the tomato market cannot possibly be (cherry, heirloom, green, …) and the “shirt” market cannot possibly be, and certainly nothing in the entertainment industry can possibly be provided “efficiently.” Not only is “standardization” not necessary, it is not desirable … would you want to live in such a world? Who advocates for that?
Similar arguments can (and should) be made against the importance of “perfect” information and “low” transactions costs. Yes, information is important, and low transactions costs are important, but their existence or lack thereof does not indicate that a market is doomed to failure. For example, market outcomes can be perfectly efficient if only a few buyers and sellers possess relevant information, and all markets operate in the presence of transactions costs. To say they exist is not an indictment of markets. Is it a market failure that Tylenol did not exist in 1825? In fact, that transactions costs do exist provide entrepreneurs, guided by market signals of prices and profits and losses, to figure out ways to mitigate them. What similar incentives are at work in non-market arrangements? Because my neighbors across the street from me love me and are my fellow citizens of Bushnell’s Basin does that make them work hard to reduce the transactions costs I bear upon entering various market transactions?
Moreover, if there are information problems in markets, and if there are transactions costs in markets, what wonderful hallucinogen must you be taking to think that once these very same individuals enter the political sphere that suddenly they are endowed with the perfect amount of information and that somehow transactions costs fall. Anyone who has ever tried to get a liquor license or become a credentialed hair stylist might have a story or two to tell you. If compare you must (I do not wish to, I prefer market organization on other grounds aside from sound economics), then the standard of comparison is not how a market process compares to some ideal “solution” but rather how a market process compares to the other alternatives. And in that race my friends, it is a bit like the 1973 Belmont Stakes.
